Economist tracks income inequality through rise of the 1 percent: Tim Rutten

Income inequality has become American politics’ equivalent of the weather: Everyone talks about it, but nobody seems able to do anything about it — or even, to agree on whether anything should be done.

Still this endlessly contentious conversation reached a sort of milestone last week, when — on Wednesday — French economist Thomas Piketty’s “Capital in the Twenty-First Century” reached Number One on Amazon’s best-seller list. At 685 pages studded with charts and followed by appendices of footnotes, explanations of mathematical methodologies and links to relevant databases, the book is hardly the work of a populizer, though the 42-year-old professor at the Paris School of Economics is an usually fluent and culturally literate writer for a practitioner of the dismal science and has been rather elegantly translated by Arthur Goldhammer. Yet it has sold more than 80,000 copies in the last two months.

In a review for the current issue of the New York Review of Books, Nobel Prize-winning economist Paul Krugman calls Piketty’s book “magnificent,” as well as “truly superb” and “awesome.“ His eminent colleague Robert Solow echoed those sentiments in the New Republic, joining those economists who have hailed the Frenchman’s work as “revolutionary.” In fact, it should refocus the entire civic conversation about income inequality — and inform our considerations of potential remedies. “This is a book,” writes Krugman, “that will change both the way we think about society and the way we do economics.”

Piketty’s work, as Krugman points out, conclusively establishes that we are indeed living through a “second Gilded Age — or, as Piketty likes to put it — a second Belle Époque — defined by the incredible rise of the ‘1 percent.’” Along with Berkeley’s Emmanuel Saez and Oxford’s Anthony Atkinson, Piketty has pioneered statistical methods that allow us to track the path of American, French and British income inequality though the centuries. Most of the previous studies of inequality have focused on the situations of the middle class or the poorest 20 percent, but — according to Krugman — “Capital” establishes the concentration of wealth in the top 1 percent of the population as “the big story in rising inequality.” In Piketty’s view, the post-war period in which middle-class incomes and wealth rose rapidly along with those of the poor and the concentration of wealth at the top declined, was an historical anomaly created by the two world conflicts and intervening Depression. Since the 1970s, the historical propensity of capitalism to efficiently allocate resources, but to concentrate capital in the hands of a statistical elite, has dramatically reasserted itself in the form of stagnant wages and income for the middle class and declining economic prospects for the poor.

Advertisement

Between 1970 and 2010, for example, the share of national wealth in the hands of America’s top 1 percent rose from 9 percent to 19.8 percent. “The big idea of ‘Capitalism in the Twenty-First Century,” according to Krugman, “is that we haven’t just gone back to 19th Century levels of income inequality, we’re also on a path back to ‘patrimonial capitalism,’ in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.”

The urgency of the renewed conversation over income inequality is something Californians know firsthand and all too well. While disparities in wealth have grown dramatically everywhere in America, they have increased more in this state than in 47 others. Only New Mexico and Arizona suffer more income inequality than California. Since 1970, the poorest 20 percent of Californians have seen their household incomes grow by just 3.1 percent, while those of the middle 20 percent have increased 19.6 percent. By contrast, household incomes among the richest 20 percent of our population have climbed 74.6 percent, while those of the wealthiest 5 percent have skyrocketed an astonishing 122 percent. Three of the 10 American cities with the greatest disparities in wealth are in California — San Francisco, Oakland and Los Angeles. In 2009, the most recent year for which complete figures are available from the Franchise Tax Board, the bottom fifth of California’s taxpayers had an adjusted gross income of $13,080, while the top 1 percent had incomes of $400,635 or more.

Just as Piketty’s analysis predicts, the top 5 percent of the state’s taxpayers received 15.2 percent of their income from capital gains, 26.8 percent from investments and business income and 54.5 percent from work. That latter figure is significant and one of the things that makes American inequality different from its European manifestations. Here the growth of so-called “super salaries” among financial, corporate and other executives means that the top 5 percent of Americans derive most of their income from their work. That’s particularly true in California, with its many digital and biotech billionaires. As many economists point out, however, the ability to pass such wealth on to their heirs because of our historically low inheritance taxes means that the next generation of wealth will be in the hands of a revived rentier class. Meanwhile the bottom 95 percent of California taxpayers continue to receive better than 80 percent of their income from wages and only 1 percent from capital gains.

This is hardly a new phenomenon. Since 1987, 71.3 percent of all the gains generated by California’s dynamic economy have gone to the state’s wealthiest 10 percent and 35.5 percent to the top 1 percent. Over that period, the average income of the top 1 percent — adjusted for inflation — rose by a remarkable 143.7 percent to $1.1 million. Meanwhile, the inflation-adjusted incomes of those in middle 20 percent the fell by nearly 15 percent. As a consequence, the top 1 percent now enjoys an income that is 33 times larger than the middle 20 percent, which is gap twice the size it was a generation ago.

These are the sorts of disparities that build resentment and social strife. As Piketty argues, “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the 19th century and seems quite likely to do again in the 21st, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”

A recent analysis by Princeton University scholars, in fact, argues that America’s increasingly defensive and assertive 1 percent — abetted by the U.S. Supreme Court’s grant of carte blanche to big money politics — risks pushing the United States from democracy to oligarchy. “The experience of France in the Belle Époque,” Piketty writes, “proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interest.”

Grinding, intractable inequality of the sort into which the American economy once again has fallen is not just oppressive; it’s dangerous. The sorts of policy adjustments that might yet save us — restoration of a more progressive federal income tax (Piketty recommends taxing incomes over $500,000 at 80 percent) and realistic capital gains and inheritance taxes — are out of the question in our current political climate.

The question we ought to be asking ourselves is: Who gains from our dysfunctional torpor?

Tim Rutten is a columnist for the Los Angeles News Group. ruttencolumn@gmail.com.